Deficits Don't Matter To America's Oligarchy

by Ted Frier

Labor may indeed deserve much of the higher consideration, as we are reminded by that first Republican president, Abraham Lincoln, who said labor is superior to capital since capital is but the fruit of labor and could never have existed had labor not existed first. But on this Labor Day I would still like to talk about capitalism, and in particular the deficits, debts and borrowing that go with it.

The inconsistencies in the Republican Party's position on federal budget deficits are too gross for these contradictions to be completely explained away as rank hypocrisy or political opportunism. Eight years of reckless fiscal profligacy were not enough to provoke the GOP's anti-government Tea Party factions to take to the streets in protest.

Nor have hysterical warnings of imminent national insolvency been enough to inspire the celebrated "deficit hawk" Paul Ryan to produce a federal budget plan that does anything more than increase the national deficit, and by $2.5 trillion. Neither does Ryan envision producing balanced budgets until well into the 2030s, as he finally admitted to Fox News host Brit Hume after relentless grilling.

Equally unsatisfactory is the suggestion that Republicans are not really concerned with deficits at all, but instead use fear-mongering over the nation's debts to cut spending as a prelude to further tax cuts for the rich. Naked self-interest is a terrible thing, to be sure, but still does not suffice as an explanation for the GOP's deficit-fever.

In short, hypocrisy, cynical opportunism and crass self-interest all fall short as reasons for the Republican Party's lack of credibility as "fiscal conservatives" on debts and deficits. All fail to account for the symbiotic relationship between government and high finance or how closely the rentier classes' profits are linked to its ability to exploit government's powers and resources for its own selfish purposes.

What we know from the radical changes that have taken place in the US economy over the last 30 years - as Wall Street and finance have replaced manufacturing as our most important industry, making up 25% of the economy and earning more than 40% of all corporate profits -- is that the so-called private "free market" has become an extension of government itself since the manufacture of the signature product of this new economy - debt - is impossible without the laws that define it.

Nor, it turns out, is it really possible to operate in an economy so heavily reliant on exotic financial derivatives and other complex forms of debt without controlling the government itself, and with it government's ability to control the timing of the expansion and contraction of credit so as to make and protect the profits of vested interests and insiders.

This may be why Michael Lind, Policy Director of the Economic Growth Program at the New America Foundation, recently said that Republicans are not really a "pro-business" party at all but rather a "pro-investor" one instead. And since today's richest Americans hold so much of their wealth in financial assets that are not adjusted for inflation, Lind says "the creditor elite in every modern country wants central banks to stamp out all forms of inflation (other than asset inflation) no matter the consequences to economic growth or employment."

If Republicans really believed federal deficits were mortal threats to the economy they would try to do more to prevent them, which they don't. Instead, the wildcat "boom/bust" cycles of yesteryear, in which everyone seemed to suffer, have been replaced by a new business cycle in which a plutocratic elite with its hand securely on the levers of power is able to manipulate government policy in its favor - loosening the controls on money to fuel its high-stakes speculations then slamming on the brakes to impose economy-suffocating austerity that preserves its ill-gotten paper gains against the erosion of inflation - no matter the price that must be paid by the poor in terms of critical programs eliminated or shrunken life's prospects.

And how much better for Republicans if those Boom years of what economic historian Kevin Phillips calls "go-go capitalism" coincide with Republican administrations while the Busts that must be cleaned up once the bubbles burst are left for Democratic ones.

One reason it's short-sighted to think there's a separate and distinct "free market" that produces wealth and profits apart from that market's entangling alliance with government, is that throughout history one of the most reliable generators of private fortunes has been a function that practically defines the modern state - war. As historian Gordon Wood writes in his new book about the origins of the United States, we are just beginning to understand how the Revolutionary War, like all other wars, "radically transformed America's society and economy."

The needs of the army for everything from blankets to wagons, meat to rum, created a host of new manufacturing and entrepreneurial interests "and made market farmers out of husbandmen" who had scarcely ever traded with others before, writes Wood. To pay for the needs of the army, Revolutionary governments issued between $400 to $450 million dollars in paper money, which was a huge amount for a barter economy accustomed to paying for medical care with chickens, as one unfortunate Republican candidate recently reminded us.

Indeed, said Wood, "no event in the 18th century accelerated the capitalistic development of America more than did the Revolutionary War." Economic troubles began not with the onset of war, said Wood, but with its termination -- and with it government's wartime purchases as well. "Too many people had too many heightened expectations and were into the market and the consumption of luxuries too deeply to make any easy adjustments to peace," Wood writes.

The collapse of internal markets that resulted from the drying up of paper money "meant diminished incomes, overextended businesses, swollen inventories of imported manufacturers of debt-laden farmers and traders," Woods said. "The responses of people hurt by these developments were very comprehensive. They simply wanted to continue what they had done during the war." It was not enough, as Wood quotes one defender of paper money saying, to have an industrious people or a fertile territory. "Money was essential too."

Under Alexander Hamilton, the new federal government's decision to repay Revolutionary War debts at par, instead of pennies on the dollar as many war widows and veterans thought they'd be getting for their unpaid certificates, produced not only a speculative mania but perhaps also one of the nation's first financial scandals as insiders exploited their access to government to swindle the deserving poor out of what was rightfully theirs.

Kevin Phillips documents a similar effect during the Civil War. The Union defeat at Bull Run completed the Hamiltonian transformation of the US economy as prospects of a long war convinced the Lincoln government to create a wartime income tax, to borrow in excess of $2.5 billion and to shift the basis of the Union's currency from gold to paper "greenbacks" in order to produce what Phillips called a "tidal wave" of government investment in northern manufacturing.

"Once the short term dislocations at the beginning of the war were past, businessmen could see the gravy train coming down the track," said Phillips. Indeed, says Phillips, financier William Dodge wrote to a friend at around the same time 50,000 lay dead or dying in the wheat fields and peach orchards around a small Pennsylvania town called Gettysburg: "Things here at the North are in a great state of prosperity. You have no idea of it. The large amount of money expended by the government has given activity to everything. The railroads and manufacturers of all kids -- except cotton -- were never doing so well."

William Dodge would no doubt have laughed out loud at Mitt Romney's assertion that America's businesses built their companies and their fortunes entirely by themselves, without the slightest assistance from the government and so without the accompanying obligation to pay anything back.

But in addition to creating private wealth for the fortunate few, the massive Civil War-era industrial investments also produced a near doubling of the commodity price index which provoked an equally abrupt shift to austerity as Congress in 1869 passed the Public Credit Act, making all government obligations redeemable in gold.

America's historical curiosity has largely bypassed the heated conflicts over currency that once produced a Greenback Party, or peculiar controversies like "bimetallism" or such memorable political rhetoric as that voiced by William Jennings Bryan at the 1896 Democratic convention, when he defied advocates of the gold standard by thundering: "You shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold."

Nevertheless, Reconstruction-era farmers howled at the sudden shift to "hard money" that creditors and Eastern bankers demanded to secure their fortunes but which meant the value of farmer's debts would soar while the price for farm products would fall, and by 25% below even 1860 levels. At the same time, as Phillips points out, speculators who bought bonds with greenbacks worth forty cents on the dollar (in gold) made a killing once the government changed the rules of the game in mid-stream.

The size and speed of the government's investment in the Civil War economy was "mind-boggling," says Phillips, and enabled the United States to achieve the same level of industrial development in four decades that it had taken Great Britain nearly a century to complete.

This same "boom and bust" phenomenon can be seen after each of America's successive wars as well, says Phillips, as the tidal wave of investment creates fortunes for a few while distributing the burdens of the receding tides of inflation to the rest.

Frequently, these war-generated inflationary periods are followed by disinflationary ones where the abundant liquidity thus created makes speculation rampant. This is what distinguished the Gilded Age after the Civil War, the Roaring 20s after World War I and the speculative booms of the 1980s and 90s following the War in Vietnam where many Americans were left out but "heyday psychologies" dominated until the bubble broke.

Those given to conspiracy theories may wonder if these "fortunes of war" are the real reason Paul Ryan and Mitt Romney have left the defense department untouched while decimating other discretionary programs at a time when the US spends more on war-making than all other nations combined. As the late Chalmers Johnson once observed: "When war becomes this profitable, we're going to see more of it."

Just as a lucky few are able to benefit from the government's investments in war-making, so too economic elites are able to cash in by taking over another critical function of the state - control of the money supply. Low taxes and weak regulations over the structure of credit allow a well-connected plutocracy to expand credit and the money supply virtually without limit during those short periods when they can make their speculative fortunes - and then hit the brakes on government spending (as Republicans are doing now) to smother any signs of inflation that might rob them of their gains.

Leave aside the all too plausible conspiracy theory that right wing Republicans deliberately manufacture budget crises in order to facilitate the dismantling of the federal government. More than mendacity or hypocrisy is at work regarding those Republican "deficit hawks" who prey aloft during Democratic administrations but retract their talons during Republican ones when conservatives behave as though (in Dick Cheney's infamous words) "deficits don't matter."

Looked at this way, we can see why debts and deficits are immaterial to Republicans in and of themselves since deficits are really just one facet of a new finance-centric business cycle where periods of debt-soaked speculation are paired with those of inflation-suppressing austerity, whose duration and timing America's oligarchs need possession of the government to control for themselves.

As we saw during the recent Republican National Convention, false dichotomies are an integral part of conservative ideology and storytelling. As Republicans promote their economic program they are also inventing a false division in which the virtuous free market ethic embraced by small business "entrepreneurs" competes with crippling dependency on "Big Government" and the corruptions of that mutant form of the free market known as "crony capitalism" where government clients feed like parasites at the public trough.

But if history is any guide, it will never be possible to make a clean break between "good" capitalism and "bad" capitalism by relying on the celebrated self-policing powers of the free market alone - not if it's a free market, it must be emphasized, whose driving force is that amoral and even corrupting incentive called "the profit motive."

Only an egalitarian civic ethic that makes the real needs of real human beings its ultimate priority - and is as sensitive to abuses from private corporations as from government authorities - will find the wisdom to fashion public power in such a way that it protects and preserves the freedoms we all revere without exciting the capacity to oppress.

"A pure market economy is an ideological fantasy," says Washington Post business writer Steven Pearlstein. "Even the freest markets operate in a framework of laws, infrastructure, institutions and informal norms of behavior in which government is heavily implicated. Our challenge is in getting that framework right."

Of course, says Pearlstein, that has not stopped conservatives like Allan Meltzer of Carnegie Mellon University from equating government with the straw men of socialism and communism -- "as if anyone in America is seriously proposing them these days."

Like lots of conservatives who seem intent on converting capitalism from an economic system into a moral and philosophical one (perhaps to disguise its empirical flaws), Meltzer must be spending too much time rereading Kant and John Locke if he seriously believes "capitalism's secret is how well it disperses political and economic power," writes Pearlstein.

To entertain such a view, says Pearlstein, one must be oblivious to the role of money in American politics as well as the "harsh realities" of global competition. A view of of capitalism as virtuous may come easily to someone working on a campus endowed by the Carnegies and the Mellons, says Pearlstein, but it is precisely capitalism's tendency to concentrate wealth and power rather than disperse it that "animates our disillusionment" with the misnamed "free" market.

To create a distinction, for ideological reasons, and as Republicans have done, between a private market system allegedly rooted in freedom, and a government-centric one coterminous with tyranny, is to deliberately misunderstand the nature of power and the vulnerability we all face from exploitation at the hands of those who exercise power, whatever its source.

And this is especially true regarding those whose wealth and position allow them to wield public power for private gain, as they do in that form of government known as "Oligarchy."

No nation can tax itself into prosperity, nor grow without money growth.

Monetary Sovereignty: Cutting federal deficits to grow the economy is

like applying leeches to cure anemia.

1. A growing economy requires a growing supply of dollars

(GDP=Federal Spending + Non-federal Spending + Net Exports)

2. All deficit spending grows the supply of dollars

3. The limit to federal deficit spending is an inflation that cannot be

cured with interest rate control.

4. The limit to non-federal deficit spending is the ability to borrow.